IU Responds To Audit Report

Unit says it intends to return some funding to school districts

November 2, 2012

The Northwest Tri-County Intermediate Unit 5, in an audit obtained by the Times Observer last week, allegedly "hoarded" approximately $14.2 million in money that should have been delivered to local school districts.

The IU's response, in a press release received late Wednesday, acknowledges an intention to return some funding to school districts but failed to address issues regarding the deficiencies in financial policies and procedures of the organization alleged in the audit.

"Like all Intermediate Units across the Commonwealth, the Northwest Tri-County Intermediate Unit 5 has made it a priority to generate funding from sources other than its member school districts in order to offer more and increasingly better services to meet the needs of today's learners," according to the release. "Through its commitment to these efforts, IU5 has accumulated a healthy fund balance to assist member districts meet the many challenges that face school districts today and in the future."

According to the audit, the IU, which provides special education supports for students in the Warren County School District and the other 16 member districts in Erie and Crawford counties, reported an $8.8 million general fund balance. When it became apparent that costs to the district from the IU were rising, questions started to flow.

While acknowledging an accumulated "healthy fund balance over time due to its aggressive nature in grant writing and partnerships," the release claims that the IU "has also taken steps to reduce overall costs of operations."

The release further explained that "the IU (has) set up an Ad Hoc Budget Committee comprised of district superintendents, board members and businesses managers. In addition, the IU board passed a resolution at its September board meeting to conduct an independent forensic audit of its programs and funding formulas."

Warren County School District Superintendent Brandon Hufnagel told the Times Observer on Tuesday night that the school board will be voting on a version of a resolution calling for an equitable conclusion to the situation. He said that the district supports the IU as well as the forensic audit the IU will undertake. He further indicated that he is hoping for a positive outcome for all of the IU's member districts.

The audit claimed "IU management established financial policies that derived your clients (school districts) and the tax payers they represent."

According to the audit, funds were accumulated by the IU over multiple fiscal years and frequently placed in "deferred revenue" accounts. "In the case of the IU, a deferred revenue liability would exist if a governmental entity and/or the member districts had paid for services that the IU had not rendered at the end of any given date." Of the $14 million, $11,325,616 was in such accounts.

The audit alleged that "the financial policies of the IU were established by the management team that was in place at any given point in time. These policies were not approved or known by the IU Board based on our review of the Board minutes and interviews of management." As a result, the IU "was able to establish cash-hoarding policies disguised as legitimate business transactions that in the aggregate concealed millions of dollars" from the districts.

The IU has agreed to return $5 million to the member districts.

"Recognizing that these are challenging times for school districts, the IU offered to return some of these funds to the districts in May of this year," the IU release said.